The FTSE 100 Index closed 1.3 per cent lower after an 84.9 point fall to 6270.4, while Italy's MIB plunged nearly five per cent and markets in France and Germany fell by more than two per cent as the deadlock is expected to make it harder for Italy to pass the reforms it needs to reduce its debts.

Wall Street shrugged off the eurozone worries as the Dow Jones Industrial Average rose more than 50 points in early trade after US new-home sales saw the biggest jump in nearly two decades last month and as US Federal Reserve chairman Ben Bernanke reinforced his commitment to the Fed's bond-buying programme.

Euro crisis: Italy faced a political vacuum after a huge protest vote in its election

This failed to ease declines on the London market as investor sentiment was also hit by weak manufacturing figures from China and the prospect of spending cuts in America as politicians struggle for an agreement to trim the budget deficit this week.

Today's sharp decline for the FTSE 100 Index comes after the top flight approached a fresh five-year high yesterday, despite the fall-out from the decision of ratings agency Moody's to strip the UK of its prized AAA status.

The pound, which received a battering after the ratings blow, fell further today despite euro weakness after Bank of England deputy governor Paul Tucker said he was open to more monetary easing and that the pound may need to fall further.

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Sterling fell to 1.51 US dollars and just under 1.16 euros as he also revealed to MPs that policymakers had discussed the possibility of negative interest rates,

Banks were hardest hit in the market sell-off, with Barclays down 14.7p at 297p, Royal Bank of Scotland off 15.3p at 339.5p and Lloyds Banking Group 1.8p lower at 53.1p.

They were joined by leisure group Whitbread after it reported slower sales growth in the 11 weeks to February 14. The figure of 2.7 per cent compared with 3.3 per cent in the previous quarter but the Premier Inn, Costa and Beefeater owner said some of the slowdown reflected the wintry conditions last month.

Shares in the top flight stock fell 94p to 2469p.

In the FTSE 250 Index, shares in Sports Direct International were five per cent lower after it emerged that founder Mike Ashley has sold a four per cent stake worth £100million.

The discounted price of £4 raised eyebrows, while there are fears Mr Ashley was calling the top of the share price after a recent rally that has seen the stock jump 46 per cent over the past year.

The disposal of 25million shares will still leave Mr Ashley with a stake of about 64 per cent, down from around 68 per cent. Sports Direct shares were 21.5p lower at 409p.

The biggest FTSE 100 risers were GKN up 9p to 261.3p, Randgold Resources ahead 140p to 5615p, Croda International 28p higher at 2584p and CRH up 14p at 1435p.

The biggest FTSE 100 fallers were Barclays down 14.7p at 297p, Royal Bank of Scotland off 15.3p at 339.5p, Vedanta Resources 46p lower at 1173p and Whitbread down 94p to 2469p.

16:15: The FTSE remains almost unchanged this afternoon at 6,274.7, still down 81.94 points or 1.27 per cent. Negative interest rates should be considered as an option to encourage banks to lend to small and medium-sized firms, the Bank of England’s deputy governor for financial stability said today.

Paul Tucker said the dramatic move had been discussed at this month’s rate-setting meeting as an option to help fuel economic growth.

Cutting the base rate from its current record low of 0.5 per cent to a rate below zero would effectively mean depositors, such as high street lenders, would have to pay the central bank to hold their money. Read more here.

Engineering group GKN, which makes driveshafts for almost half of all new cars, delivered record results today but admitted it will have to cut costs in the face of a weakening European automotive market.

Redditch-based GKN achieved a 13 per cent rise in revenues to £6.9billion in 2012 while pre-tax profits lifted 19 per cent to £497million.

All four of the company's divisions achieved record results, with demand from China and the recent sales resurgence of Jaguar Land Rover helping GKN's Driveline division improve profits by 14 per cent to £235million.

13.15: The FTSE is failing to recover this morning's losses, currently down 1.34 per cent or 84.47 at 6,270.5.

Coca-Cola has taken over Innocent after the ethical smoothie maker's young founders decided to sell up their remaining stakes - for a dizzying £100million according to reports.

The fizzy drinks empire, which already owned 58 per cent of Innocent, snapped up the shareholdings of founders Richard Reed, Adam Balon and John Wright in a deal that gives Coca Cola at least 90 per cent ownership and values Innocent in the region of £320million.

The brand’s creators - Cambridge graduates who first sold their smoothies 15 years ago from a music festival stall - will give up day-to-day management responsibilities in May but they will remain on the executive committee and insisted the brand's ethic would not be compromised by the takeover.Read more here.

12.00: The prospect of eurozone instability in the wake of this weekend's Italian election triggered big losses on world markets today.

The FTSE 100 Index is down by more than 1 per cent - 84.6 points at 6270.4 - while markets in France and Germany fell by around 2 per cent as the deadlock is expected to make it harder for Italy to pass the reforms it needs to reduce its debts.

The sharp decline for the FTSE 100 Index comes after the top flight approached a fresh five-year high yesterday, despite the fall-out from the decision of ratings agency Moody's to strip the UK of its prized AAA status.

Alpari market analyst Craig Erlam said: ‘The political uncertainty surrounding these elections is taking its toll on investors who held on for as long as they could in the interest of keeping the rally going. The message today is clear though, it's time to leave the party.’

Banks were hardest hit in the sell-off, with Barclays down 12.95p at 298.7p, Royal Bank of Scotland off 11.75p at 343.05p and Lloyds Banking Group 1.6p lower at 53.4p.

10.45: The FTSE remains deep in the red, currently down 1.37 per cent or 87.16 points at 6,268.6.

Sports retail tycoon and Newcastle United owner Mike Ashley has raised £100million after selling a four per cent stake in his company, it has emerged.

The share placing caught the market by surprise, leaving FTSE 250 Index-listed Sports Direct International as much as seven per cent lower and sparking speculation over his plans for the cash haul.

It comes amid mounting rumours over Mr Ashley's drive to expand his retail empire, with the entrepreneur said to be interested in the House of Fraser department store and collapsed fashion chain Republic.

Recently hailed a ‘high street hero’ after the group reported a 21 per cent leap in sales over the Christmas quarter, the disposal of 25million shares will still leave Mr Ashley with a stake of about 64 per cent, down from around 68 per cent.

But the discounted price of £4 has raised eyebrows, while there are fears Mr Ashley was calling the top of the share price after a recent rally that has seen the stock jump 46 per cent over the past year.

10.15: Markets are deep in the red after the Italian election result prompted fears of a debt meltdown that could threaten the euro.

The FTSE 100 fell 83.6 points to 6,271.8, while markets in France and Germany fell by around 2 per cent as the deadlock is expected to make it harder for Italy to pass the reforms it needs to reduce its debts.

Adding to the downbeat mood were weak manufacturing figures from China and the prospect of spending cuts in the US as politicians struggle for an agreement to trim the budget deficit this week.

Banks were hardest hit in the sell-off, with Barclays down 13.8p at 297.7p, Royal Bank of Scotland off 10.4p at 344.4p and Lloyds Banking Group 1.3p lower at 53.6p.

They were joined by leisure group Whitbread after it reported slower sales growth in the 11 weeks to February 14.

The figure of 2.7 per cent compared with 3.3 per cent in the previous quarter but the Premier Inn, Costa and Beefeater owner said some of the slowdown reflected the wintry conditions last month.

In the FTSE 250 Index, shares in Sports Direct International were 7 per cent lower following reports that founder Mike Ashley has sold a stake worth £100million. There was no official confirmation from the retailer, which dropped 32.1p to 398.45p.

Angus Campbell of Capital Spreads said: 'There’s a sea of red across trading screens this morning as the lack of a clear victor in the Italian elections is causing panic amongst investors.

'The uncertainty that this causes is enough to make anyone nervous and we are likely to see an interim administration for a number of months before fresh elections, unless a working coalition can be formed.

'We have to remind ourselves why Italy is so important to the survival of the euro. Silvio Berlusconi was ousted a couple of years ago and replaced by Mario Monti the technocrat leader whose sole aim was to reform the country.

'This has hardly been achieved apart from the odd bit of tax tinkering here and there so Italy, with its massive debt mountain, remains a ticking time bomb at the heart of the eurozone.

'One thing is clear from this election and has been from others in Europe of recent is that smaller parties are eating their way into the mainstream parties’ share of the vote which means governing is more difficult without a clear winner. This means that making reforms will be far more difficult to undertake.'

8.25: The FTSE 100 has plunged 90.3 points to 6,265 after elections in Italy delivered a parliamentary deadlock that threatened to blow Europe's largest debtor off the reform path and rocked global markets.

Italy faced a political vacuum after a huge protest vote left no party or likely coalition with enough seats to form a majority in the upper house - the opposite of the stable result markets were hoping for and Italy needed to tackle its economic and debt problems.

Anti-austerity parties - including comic Beppe Grillo’s upstart Five Star party - took more than 50 per cent of the vote.

The FTSE 100 closed up 19.67 points at 6,355.37 yesterday, but lost the majority of its early gains in the lead-up to the vote in Italy.

The Dow Jones in New York and Asian markets racked up huge losses overnight as the election results began to emerge.

Gary Jenkins of Swordfish Research said: 'The election result is an embarrassment for [current PM] Mario Monti, who managed to win around 10 per cent of the vote in both houses, a triumphant return for Mr Berlusconi and a breakthrough for Beppe Grillo’s Five Star Movement. One can assume that Angela Merkel had to be served her dinner with plastic cutlery last night.'

He added: 'In the short term there will of course be massive uncertainty and thus risk assets will be hit hard.

'We have already seen that to some degree with the retraction of yesterday’s intraday gains on both bonds and equities and overnight the Nikkei closed down 2.26 per cent. The most important reaction will come in the Italian bond market.

'The market turmoil may be short lived if there is a sign of a move towards a workable coalition but if this gets dragged out then all bets are off.'

Stocks to watch today include:

SHIRE: The drugmaker gained on Monday on re-hashed bid rumours, with AstraZeneca again being talked of as a potential suitor, according to the Daily Express market report.

BP: A long-awaited trial over the biggest US offshore oil spill began, with governments, businesses and individuals blaming BP Plc mostly for the 2010 disaster that killed 11 rig workers and spilled 4million barrels of oil into the Gulf of Mexico.

A 102,500 barrel-per-day gasoline-producing fluidic catalytic cracking unit remains shut at BP's 240,000 bpd [barrels per day] Los Angeles-area refinery in Carson, California, after maintenance work was extended, according to sources familiar with operations at the refinery.

BANKS: Barclays and Royal Bank of Scotland are planning to raise more capital via bonds that convert into shares in times of crisis, to help meet safeguards for taxpayers that are being demanded by regulators, according to sources.

VODAFONE : British mobile operator Vodafone said it did not need to sell part of its stake in its highly profitable Verizon Wireless joint venture in the United States to bolster its business in Europe.

IMPERIAL TOBACCO: The tobacco firm announced its intention to grow its dividend by at least 10 per cent per annum in the medium term.

GKN: The British car and plane parts maker posted a better-than-expected 19 per cent rise in full-year profit, boosted by growth at its Driveline autos unit, which benefitted from rising car sales in the United States.

ASTRAZENECA: The drugmaker announced results from long-term safety trial of Naloxegol in patients with opioid-induced constipation.

The Naloxegol trial reported no imbalances in serious adverse events. The commercialisation and launch in the US of the drug is subject to both FDA approval and DEA schedule determination.

WHITBREAD : The pubs, hotels and coffee chain owner said it sees a slowdown in sales in the fourth-quarter after report 2.7 per cent growth in like-for-like sales in the 11 weeks to February 14.

CRODA INTERNATIONAL : British specialty chemicals maker reported a 6.6 per cent rise in full-year profit, riding on growth at its consumer care business, its biggest revenue contributor.

ELEMENTIS: The chemicals maker posted sales of $757million for year ended 31 December 2012.

REDROW: The housebuilder is 'cautiously optimistic' on continued growth. Trading since the half year has been encouraging, with reservations up 8 per cent on the same period last year and it expects to propose a modest final dividend at the year end.

DECHRA PHARMACEUTICALS: The Animal health company Said its first-half pre-tax profit grew 54 per cent, but warned that its core services unit had weak sales in January caused by a significant decline in footfall at veterinary practices.

ROBERT WALTERS : The recruiter reported revenue of £567.8million for year ended 31 December 2012.

DEVRO : The sausage skin maker reported a 5 per cent fall in full-year profit and said it was implementing further price increases to recover the higher than expected rises in raw material costs during 2012.

RARE EARTHS GLOBAL: The miner warned on full-year profits.

MWANA AFRICA : The precious metals miner upgrades its gold resource.

ST MODWEN : The housebuilder has proposed a placing of up to 9.99 per cent of existing issued ordinary share capital.